2017 (7) TMI 680 - AT - Central Excise

CENVAT credit - denial on the ground that appellant have not maintained separate accounts for the common input services used for generation of electricity in their co-generation plant - Held that - the appellant is eligible to avail credit on the input services pertaining to electricity which is captively consumed. We hold that appellants are not eligible for credit on input services used for electricity which is sold outside the factory. For determining the quantum of electricity that is sold outside factory as well as determining the credit which is not eligible we remand the matter to the adjudicating authority to recompute the same - appeal allowed in part and part matter on remand.

Summary

Issues:
Disallowance of CENVAT credit on input services due to lack of separate accounts for common input services used in co-generation plant for electricity production.

Analysis:
The appellants, engaged in sugar and molasses manufacturing, set up a co-generation plant to generate electricity using input services like construction, erection, and management consultancy services. The dispute arose as the department alleged that since separate accounts were not maintained for input services used for both electricity generation and dutiable products, the CENVAT credit availed was ineligible. A show cause notice led to the confirmation of duty demand, interest, and penalty by the adjudicating authority, prompting the appeal before the Tribunal.

The appellant's counsel argued that electricity, being an exempted product, rendered them ineligible for service tax credit on input services related to electricity production. Citing relevant case laws, the counsel contended that while credit for captively consumed electricity was permissible, it was not allowed for electricity sold outside the factory. The counsel also highlighted an amendment to the CENVAT Credit Rules, clarifying the treatment of exempted goods, including electricity, effective from April 1, 2015.

On the other hand, the department's representative supported the impugned order, emphasizing the necessity of separate accounts for common input services used for dutiable products and external electricity sales to claim credit.

The Tribunal deliberated on whether electricity should be considered exempted, non-excisable, or dutiable, noting the historical treatment of electricity in the Tariff Schedule. Referring to precedent judgments, the Tribunal acknowledged the need for proportionate credit reversal for electricity sold externally while allowing credit for captively consumed electricity. Consequently, the matter was remanded to determine the quantum of electricity sold externally and the corresponding credit ineligibility, with the adjudicating authority instructed to reassess after providing a fair hearing to the appellants.

In conclusion, the Tribunal held that the appellants could claim credit for input services related to captively consumed electricity but not for electricity sold outside the factory. The contentious nature of the issue led to the setting aside of the penalty, considering the subsequent amendment clarifying the treatment of exempted goods. The appeal was partly allowed, with a remand to the adjudicating authority for further evaluation.